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Nordstrom (JWN) Down 18.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Nordstrom (JWN). Shares have lost about 18.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Nordstrom due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Nordstrom Q1 Loss Wider Than Expected, Sales Down Y/Y

Nordstrom reported dismal first-quarter fiscal 2020 results, wherein sales and earnings declined year over year. Despite a solid start to the first quarter, the onset of coronavirus led to temporary store closures starting Mar 17. This had a material impact on the company’s quarterly results. Hence, the company earlier refrained from providing any guidance for fiscal 2020.

However, it is making efforts to strengthen the financial position to overcome the COVID-19 hurdle by reducing inventory by more than 25% year over year along with lowering cash burn by more than 40% from March to April.

Q1 Highlights

Nordstrom posted adjusted loss of $2.23 per share against earnings of $0.23 in the year-ago quarter. The figure also came wider than the Zacks Consensus Estimate of a loss of $1.21 per share.

Total revenues declined 38.5% to $2,119 million, while net sales fell 39.5% to $2,026 million. The Zacks Consensus Estimate for sales was pegged at $2,251 million. Temporary store closures for nearly half of the reported quarter stemming from the ongoing pandemic hurt sales to a large extent. Apart from these, the company’s Credit Card net revenues edged down 1.1% to $93 million.

Nordstrom’s full-price net sales (including the U.S. full-line stores, Nordstrom.com, the Canadian operation, Trunk Club, Jeffrey and Nordstrom Local) declined 36% to $1,357 million in the fiscal first quarter. The company’s off-price net sales (including Nordstrom U.S. Rack stores, Nordstromrack.com/HauteLook and Last Chance clearance stores) slumped 45% to $669 million. The decline in full-price and off-price sales were a result of softness in the average selling price, which was only partly offset by gains from sturdy online traffic and conversion trends.

Meanwhile, digital sales advanced 5% in the reported quarter. This represented 54% of the company’s business, up from 31% in the year-ago quarter. Robust online demand was somewhat offset by the unfavorable timing of unshipped orders and expected returns.

Operational Update

Nordstrom's gross profit margin contracted significantly to 11% from 34% in the prior-year quarter. This downside was due to higher markdowns in a bid to clear inventory and soft sales volume. Ending inventory declined 26% from last year due to higher promotions and marketing activities to lower inventory.

Selling, general and administrative (SG&A) expenses, as a percentage of sales, grew significantly to 55% from 34% in the year-ago quarter. Excluding charges of $250 million related to COVID-19, expenses fell nearly 25% during the quarter under review stemming from lower sales volume and a reduction in overhead costs owing to store closures.

Further, loss before interest and taxes for the reported quarter came in at $813 million against earnings before interest and taxes (EBIT) of $77 million due to a decline in sales volume stemming from temporary store closures and charges of $280 million related to COVID-19.

Store Update

The company earlier closed all Nordstrom full-line, Nordstrom Rack, Trunk Club clubhouses and Jeffrey stores starting Mar 17. However, it has now started reopening few stores from early May, with roughly 40% of its store fleet open. The reopened stores are also offering contactless curbside pickup facility. Going ahead, Nordstrom intends to reopen the remaining stores by the end of June.

Apart from these, the company recently noted that it has decided to permanently close three Jeffrey specialty stores along with the 16 full-line stores announced earlier.

Other Financials

Nordstrom ended fiscal 2019 with cash and cash equivalents of $1,355 million, long-term debt (net of current liabilities) of $3,264 million and total shareholders’ equity of $397 million.

The company used $778 million of net cash from operating activities and spent $131 million as capital expenditures in the quarter under review. At the end of the quarter, it had free cash flow of $826 million.

Moreover, management suspended its share repurchase program and dividend payments in the wake of the COVID-19 crisis. Also, the company withdrew $800 million from its revolving credit facility. Further, it targets a reduction in operating expenses, capital expenditures and working capital to the tune of roughly $500 million, which will be incremental to its initial savings goal of $200-$250 million for fiscal 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -154.76% due to these changes.

VGM Scores

Currently, Nordstrom has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Nordstrom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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